Introduction to Los Angeles’ ‘Mansion Tax’

Los Angeles voters approved Measure ULA, a transfer tax on the sale of high-value properties, in 2022. Nicknamed the mansion tax by its supporters, Measure ULA imposed a 4% tax on sales over $5 million and a 5.5% tax on sales over $10 million — one of the steepest such levies in the nation. Its revenue is earmarked for low-income housing programs.

Problems with the Current Tax Structure

ULA’s tax is paid by sellers, which may explain why Mayor Karen Bass suggested suspending it after the wildfires. The mayor is right to worry. Property values in Pacific Palisades often top $5 million, creating concern that the tax could penalize owners who lost everything and just want to sell and move on. But Measure ULA’s problems run deeper. Suspended or not, it needs to be reformed.

Impact on Various Properties

Despite its nickname, ULA isn’t just a tax on mansions. It applies to nearly every property priced over $5 million, including apartment buildings, offices, soundstages, hotels, and shopping centers — places Angelenos live, work, and shop.

Taxation Based on Sale Price

Additionally, ULA is not a tax on profit. It’s based on sale price. Thus, the owner of an office building that has plunged 90% in value since the COVID-19 pandemic might sell it for $15 million and incur an $825,000 ULA tax, despite the owner’s overall loss. On the other hand, someone who bought a house 10 years ago for $500,000 and sells today for $1.5 million would pay nothing. ULA’s design means large losses may be heavily taxed while big gains go scot free.

The Issue of "Cliffs"

Measure ULA also has steep “cliffs” — thresholds where small price increases trigger massive tax increases. A property selling for $5 million incurs no ULA tax, but one selling for a dollar more pays $200,000. Such cliffs create strong incentives for owners to avoid the tax.

The Consequences of ULA

The easiest way to avoid the tax is to not sell, and our research shows that over the first two years since ULA was implemented, high-value property sales in the city fell by about 50% — a far steeper decline than elsewhere in the county during the same period. Higher interest rates and construction costs aren’t to blame for the decline — those conditions affected the entire region. And while there was a temporary “rush to sell” before ULA was implemented, our analysis accounts for that behavior. The 50% drop is an effect of ULA specifically.

Reduced Revenue and Housing Production

Depressed sales mean less revenue generated by ULA. Backers estimated ULA would raise $600 million to $1.1 billion annually. So far, collections have averaged just $288 million per year — less than half the lowest projections.

Impact on Affordable Housing

By reducing large sales, moreover, ULA has slowed the production of market-rate apartments. Most multifamily developments involve buying a suitable site and then selling the finished building. ULA can add significantly to the cost of both of those transactions. And because most market-rate housing developments now include some income-restricted affordable apartments provided by developers in exchange for increased project size, Los Angeles is getting fewer of those, too. Conservatively, we estimate ULA is costing the city more than 1,900 new units a year, of which at least 160 would have been affordable units produced without public funding. Meanwhile, the ULA revenue collected from newer multifamily projects since the tax went into effect is only enough to subsidize, at best, half that number. ULA’s poor design needlessly costs the city affordable housing.

Broader Economic Impacts

The impact doesn’t stop at housing. ULA has also slowed large transactions for commercial, industrial, and office properties. This effect, combined with the slowdown in residential transactions, is impeding property tax growth. Under California’s property tax system, local revenues increase primarily when properties are reassessed at sale. Large transactions contribute disproportionately to that growth. Sales over $5 million are only 4% of all transactions but account for more than 40% of the growth in the city’s tax base. Over time, fewer big transactions mean less funding for all public agencies and programs that rely on L.A.’s tax base: schools, community colleges, and the county and its safety-net programs.

Potential Solutions

Although the ballot language for Measure ULA included strong limits on the City Council’s power to amend it, ULA is fixable. The most effective approach may be state action. State governments almost always have the power to revoke or amend local actions, and transfer taxes are arguably an issue of interest to the state, because they have direct effects on California’s housing goals and overall fiscal health.

Targeted State Legislation

Targeted state legislation could reduce ULA’s negative effects while preserving its goal of raising funds to help low-income renters. Options include restricting the tax to single-family homes (making it a true mansion tax), adopting marginal rates to eliminate the “cliffs” (to work similarly to income taxes), or limiting ULA to properties that haven’t been sold or improved in many years; sales of these properties are much more likely to represent a large windfall for sellers and such sales would not tend to undermine housing and job creation.

Conclusion

Los Angeles needs housing and economic policies that work — especially as we recover from the January wildfires. That means balancing the urgent need for new revenue with policies that encourage new housing and jobs. Measure ULA, as currently structured, makes that balance harder to achieve. It could become a better tool — one that fulfills voters’ hopes for more affordable housing, strengthens the local economy, and protects the social and fiscal foundation of the region.

FAQs

• What is Measure ULA? Measure ULA is a transfer tax on the sale of high-value properties in Los Angeles, enacted to raise funds for low-income housing programs.
• What are the rates of the tax? The tax imposes a 4% rate on sales over $5 million and a 5.5% rate on sales over $10 million.
• What properties are affected by ULA? ULA applies to nearly every property priced over $5 million, including apartment buildings, offices, soundstages, hotels, and shopping centers.
• How has ULA impacted property sales in Los Angeles? High-value property sales in the city have fallen by about 50% since ULA was implemented, reducing the revenue generated by the tax and slowing the production of market-rate apartments.
• What are the proposed solutions to ULA’s problems? Solutions include restricting the tax to single-family homes, adopting marginal tax rates, or limiting ULA to properties that haven’t been sold or improved in many years, potentially through targeted state legislation.